ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Increased government spending is good for the economy, too, but it can lead to scarcity in some goods and inflation will follow. Another explanation is cost-push inflation, whereby costs of production increase and higher prices are passed on to consumers.

Detailed explanation-2: -A surge in demand for products and services can cause inflation as consumers are willing to pay more for the product.

Detailed explanation-3: -Taxes finance government spending; therefore, an increase in government spending increases the tax burden on citizens-either now or in the future-which leads to a reduction in private spending and investment. This effect is known as “crowding out."

Detailed explanation-4: -Government Finance: During the period of inflation, government revenue will increase as more income is obtained from income tax, sales tax, consumption tax, etc. Similarly, as the government needs to spend more and more money for administrative and other purposes, public spending will increase.

Detailed explanation-5: -According to Quantity Theory: Inflation is caused when the rate of increase in the money supply is faster for example printing more notes than the growth of real output. Because there is more money pursuing the same quantity of commodities, this is the case.